Business and EU innovation policy not working effectively to produce economic benefits

LONDON, 8 May 2012 – Few senior business leaders across Europe are aware of the European Union’s significant investment in innovation in recent years according to a study launched today by EY and the Centre for European Policy Studies, The Power of Simplicity. The study surveyed 680 business leaders from 15 EU Member States and found that 73% of respondents, many of whom have to make the key decisions about private sector investment in Europe such as presidents and chief executives, were not aware of EU policies to improve innovation. In addition, 69% believe innovation policy in the EU has not matched industry needs.

Alessandro Cenderello, Head of EY’s EU Institutions Practice, says, “Policy-makers and business leaders are turning to Europe’s innovators to provide much needed growth. An effective EU innovation policy relies on the needs of these three groups being coordinated, through the implementation of large-scale pan-European strategic projects focusing on key industries and enabling technologies. Moreover, since the EU continues to face austerity and the threat of recession, a more streamlined, market-driven innovation policy is needed to catalyze growth across the EU - a simplified approach towards access to finance for SMEs is also key in this area. ”

Jay Nibbe, EY EMEIA Markets Leader, says, “As rapid-growth economies continue to flourish and compete with more developed markets such as the EU, charting a course for sustainable growth will not come easy. But bridging the disparate worlds of policy and business is a necessary first step. A more effective innovation policy will help drive demand, and put the EU in a better position to derive competitive advantage from the continuing opportunities of globalization.”

Additional challenges to effective innovation in Europe

R&D gap – Across the EU, there is a much greater concentration of public funds and a reduction in percentage terms of private R&D compared to other regions. In the US, South Korea and Japan, private R&D spending has been on the increase in recent years. Sixty-nine percent of respondents view innovation policy in the US and Japan as more effective than in the EU. The only European countries where private R&D spending is above 2% of GDP are the ones leading in innovation performance – Sweden, Finland and Denmark. This view is reflected by the survey findings in which 82% of the survey respondents think that EU policy is too fragmented and needs greater coordination.

Limited financing options – The absence of a genuinely integrated market for many of the most innovative sectors, including knowledge intensive services, is a serious issue. Financial markets are also currently disjointed and the level of regulation varies across borders.

Alessandro Cenderello says, “The lack of harmonization across the EU prevents cross-border capital investment and the creation of funds in areas where financing for innovation is most needed. Smart regulation, together with an acceleration in the implementation of the Single Market would boost innovation and growth across the EU.”

Inadequate infrastructure – Building resilient infrastructure in Europe has not proved easy. Although initiatives have been launched to develop network infrastructure across the EU, 73% of respondents to our survey want the EU to spend more money on building a common broadband infrastructure. Insufficient investment has been directed towards areas such as distributed computing infrastructure systems which would enable round the clock access to data and increased productivity for researchers and would-be entrepreneurs.

Report recommendations

The report proposes a new approach to EU innovation that aims to improve its effectiveness and reduce administrative burdens for companies relying on EU funding channels:

Governments should act as leaders and investors by creating the main building blocks of an innovative environment – world-class infrastructure, a high-performing education system, and research and innovation-friendly legal rules.

Governments should create funding and facilitate initiatives to strengthen links between researchers, entrepreneurs and private investors

Government has the key task of “nudging” existing innovation efforts towards long-term policy goals. This should mostly occur through the strategic use of public procurement.

Alessandro Cenderello says, “Policy-makers should consider innovation at every phase of the policy cycle. In particular, regulation and competition policy should be handled by the European Commission in a way that is compatible with innovation. The recent announcement by the Competition Commissioner, Joaquin Alumnia, that the state aid regime will be revised and made more growth-friendly is to be strongly welcomed, since collaboration between SMEs and large corporations is crucial.”

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About the study

For its second report on Government and Innovation, EY, in collaboration with the Centre for European Policy Studies, put forward a series of proposals to deliver a simpler and smarter innovation policy for the EU. Our analysis is backed by a survey of 680 business leaders from 15 EU Member States to get their perspective on the EU’s innovation policy. The countries involved were UK, Germany, Netherlands, France, Ireland, Belgium, Finland, Sweden, Austria, Hungary, Poland, Italy, Greece, Spain and Portugal. The business leaders interviewed are senior managers including the ranks of president, chief executive, chief financial Officer and their direct reports. Twenty-three percent of the companies had an annual turnover higher than €1.5b; 44% were between €150m and €1.5b; and 33% had an annual turnover under €150m.

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